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What’s it? Customer value refers to a product’s worth to a customer. It represents the difference between the perceived benefits and the costs incurred to obtain those benefits.
Perceived value depends on customer perception, as some benefits or costs cannot be quantified. In addition, when making purchasing decisions, consumers also depend on the relative value (benefits and costs) of a product to alternative products. Therefore, they will choose the most valuable.
Businesses need to create value for customers to be successful. Success is not only judged by the size of their sales or profit figures. We also have to look at how much value companies create for their customers. This becomes a reason for customers to continue to buy products, be loyal, and be reluctant to switch to competitors’ products.
In simple terms, businesses can generate and maximize customer value by offering customers perceived benefits. But at the same time, they must ensure that consumers make a small sacrifice to buy their products.
When buying, rational customers compare the benefits they get with the sacrifices (costs) they have to pay. Both affect customer satisfaction. When the benefits outweigh the costs, the customer is satisfied. Conversely, lower benefits than costs result in dissatisfaction.
Unique selling proposition and customer value
In the competitive world of business, a unique selling proposition (USP) is a critical differentiator. It goes beyond simply offering benefits to customers; it’s the core essence of how your company creates superior value compared to competitors. A strong USP establishes a clear distinction in the marketplace, attracting and retaining customers.
Your USP hinges on a deep understanding of customer value. This encompasses the perceived benefits a customer receives from your product or service, weighed against the associated costs (price, time investment, effort). Technology creates value by enabling businesses to gather customer data and feedback, allowing them to tailor their offerings to meet these specific needs and preferences.
A successful USP maximizes the difference between the benefits your product offers and the costs customers incur. For example, a company might create a value proposition centered around exceptional product quality and durability, justifying a slightly higher price point compared to competitors. Alternatively, a company might focus on convenience and ease of use, offering a subscription service that streamlines product access for customers.
Ultimately, the success of your USP can be measured by sales volume and customer loyalty. Strong sales figures indicate your product resonates with customers and delivers on its value proposition. High customer retention rates suggest satisfaction with the perceived value received. By continuously monitoring these metrics and incorporating customer feedback, businesses can refine their USP to ensure they remain relevant and competitive in the ever-evolving marketplace.
Why is customer value important?
Satisfaction. Customer value is important because it affects customer satisfaction. A rational customer will compare the benefits and costs. They will buy a product if the benefits outweigh the costs, giving them satisfaction.
Market position. By creating superior value, your company can encourage your customers to be loyal. It is also the reason competitors’ customers switch to your product. It all ultimately contributes to increasing your market share.
But, customer value also depends on the available alternatives. Customers have several product choices. When they buy, they will compare these products. If your product provides better value, they will, of course, choose your product.
Secure money. Because competition in the marketplace is dynamic, the relative value you provide can also vary, even as you maintain your current edge. For example, competitors innovate to improve their products. In the end, customers choose them because they are considered to provide a better offer.
For this reason, maintaining superior value is the key to winning the competition. If you are successful in doing so, consumers will continue to buy your product, which means the money will keep flowing to you.
How to measure customer value?
Customer value is a function of benefits with costs. So, conceptually, the calculation is easy. You just need to deduct the costs from the benefits. But we need to underline that it’s from a consumer perspective, not a business perspective.
- Customer value = Benefit – Cost
The formula above shows us the value will be higher if the company can offer consumers higher benefits, lower costs, or, ideally, a combination of both.
At the same cost, a product can produce higher value if it provides greater benefits. Or, with the same benefits, the customer will choose a product if the costs involved are less than the other products.
Although the above formula seems easy to calculate, calculating the numbers is somewhat complex. Benefits and costs are not always numeric numbers; they are also often abstract.
What are examples of creating customer value?
There are several ways to deliver superior customer value. Basically, it just needs to increase the difference between benefits and costs, which can be done through price, product features, and convenience.
Attributes attached to the product
Benefits can come from the quality, design, features, and other product attributes. We can more easily quantify them.
Take, for example, a t-shirt. We can use the quality of the fabric and design to describe the benefits obtained by the customer.
Another example is smartphones. Benefits can come from greater storage capacity. Or, it’s from a larger camera resolution.
Intangible aspects
Benefits also come from the company’s image, brand, and values. These factors contribute to the overall customer value proposition, but they can be more difficult to quantify than product attributes. Each customer usually provides a different perspective on the weight they assign to these intangible aspects.
Some people don’t just look at product attributes. They also consider the brand and the customer value it represents. For example, they may see several t-shirts of the same design and quality. But since they didn’t come from a famous fashion house (which might represent luxury or exclusivity to them), they didn’t perceive the same level of customer value and, therefore, didn’t buy it.
In other cases, consumers only buy products from certain companies because they share similar values. Here, the customer value proposition is heavily influenced by the company’s alignment with the customer’s principles. For instance, they might only buy environmentally friendly products, which are based on their principles and values, because they see a higher customer value in these products due to the environmental benefits.
Price
Price is the most common measure to describe the costs associated with obtaining benefits. It represents the monetary cost of getting the product.
Thus, companies can create customer value by offering lower prices. It reduces the dollars spent by customers on product benefits.
However, in specific cases, the price can also represent benefits. For example, when the price of goods rises, consumers become increasingly interested in them. In economics, we call these Veblen goods.
For example, some people are happy with luxury goods because it gives them high satisfaction. The higher the price, the more valuable, and the more satisfied they are.
Customers do not only see the basic functions of the product. However, they are also concerned with how the product can enhance their image and prestige. And higher prices provide such benefits.
Time, effort, and energy
Minimizing costs doesn’t just focus on the dollars customers pay to buy the product (price). It’s about creating exceptional customer value beyond a lower price tag.
Indeed, price is vital, but customers also consider other aspects before deciding to buy. What the customer spends is not just the price; it can also involve time, effort, and energy spent getting the product.
Take, for example, laptop products. First, customers spend some time comparing products, whether related to price, specifications, quality, or brand. Then, having decided, they probably finish fueling their way to the shop. Once purchased, they may also have to learn to use it and install some software programs. Those are all costs.
Convenience
Inconvenience can significantly impact a customer’s perception of a product or service, ultimately affecting customer value. For example, requiring customers to use only cash for transactions can be seen as an inconvenience. This can lead to frustration and potentially deter them from making a purchase. In essence, the inconvenience adds a cost (time, effort) that wasn’t previously factored into the perceived value of the product.
Conversely, businesses can leverage technology to create customer value by offering convenient solutions. Cashless transaction services, for example, offer a clear benefit to customers. By providing a faster and more streamlined payment method, businesses remove obstacles and enhance the overall customer experience. This convenience contributes to the perceived value proposition, potentially justifying the product’s price point and increasing the likelihood of a purchase.
In conclusion, businesses need to consider both the perceived benefits and potential inconveniences associated with their offerings. Technology plays a crucial role in this equation, offering tools to minimize inconvenience and maximize customer value across the entire customer journey.
